As TheStreet reported in January, hedge funds including Akanthos Capital Management, Gator Capital Management and Bronte Capital have bought preferred equity shares of Fannie and Freddie for pennies on the dollar, betting they will eventually recover some, if not all, of their original value. Akanthos founder and portfolio manager Michael Kao reiterated his bull case on the investments at the Value Investing Congress in Pasadena last week.

Since that Jan.7 report (and the accompanying video embedded above) Freddie Mac "Z" shares, one of the more widely-traded preferred issues, have roughly quadrupled in value, though at $2.76 as of late Friday, they are worth just over a tenth of their November, 2007 $25.55 issue price.

The latest hedge fund manager to publicly disclose a position in the preferred shares is Kyle Bass, who told attendees at the SkyBridge Alternatives Conference that the securities "could be an eight to ten bagger from here," according to Dow Jones' MarketWatch.

There have been industry rumors that hedge fund giant Paulson & Co. has also been buying Fannie and Freddie preferred shares. A spokesman for Paulson & Co. declined to comment.

Certainly Paulson has the expertise in house to do his homework on Fannie and Freddie. Paulson & Co. partner Robert Lacoursiere used to cover the GSEs as an equity research analyst at Bank of America. To his credit, he had a "sell" rating on Fannie as early as 2005, though he raised his target price to $48 in early 2006.

Fannie shares have been below the $1 mark for most of the nearly three years since the government put the GSEs in conservatorship. They closed at 39 cents per share on Friday and even the hedge fund managers buying the preferred shares generally conclude the common shares are worthless.

Preferred stock, despite its misleading name, is actually more similar to debt. It usually pays a high coupon--higher than bonds--but holders of these securities also assume greater risks than other debt holders.

Fannie and Freddie stopped making coupon payments after the U.S. Treasury Department put them into conservatorship in Sept. 2008, essentially wiping out their value, and inflicting big losses on many small banks that owned the securities.

PIMCO managing director Neel Kashkari, who oversaw the Treasury's bailout program at the Treasury Dept. during the Bush administration and at the start of the Obama presidency, told TheStreet the decision to protect more senior debt holders while creasing coupon payments on the preferred securities was based solely on a desire by former Treasury Secretary Hank Paulson to interfere in markets as little as possible while trying to stave off a systemic meltdown.

"Anybody who is crying about the fact that they didn't get a bailout needs to wake up and realize there was a clear reason behind the actions taken by the government, which was to stabilize the market in a time of crisis. Nobody was supposed to get a bailout. No one had a right to a bailout," Kashkari said.

Kashkari was somewhat more sympathetic to the argument that small banks had initially been encouraged by the government to buy Fannie and Freddie preferred securities before eventually getting wiped out on these investments when the Treasury decided to stop paying their dividends.

"I can understand that perspective, but everything had a timing and a sequencing," he said, before adding, "No one was making any promises that those Fannie and Freddie preferred shares had the full faith and credit of the government. Those banks could have bought Treasuries."

Kashkari said that while he "hasn't studied" the question about whether the preferred shares may eventually recover their value, he would be "very surprised if they're worth anything," since they still owe the government more than $150 billion between them.

"The Federal government still looks like it's going to take a net loss, which means shareholders should get wiped out completely."